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Report of the commissioner of corporations on the steel industry ... online

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corresponding amount and consequently the average per ton of product. But the scrap, of course, is used
again in prior processes of production (and sometimes in the same process in the case of steel works); that
is, the scrap goes back either to the blast furnace or to the steel works. Inasmuch as it carries with it that
portion of the integration profit attributed to it, it tends to increase the integration profit in the pig iron
or ingots, respectively, and, hence, to give them still higher integration profits, and consequently lower
integration costs. In particular, it may be noted, it tends to diminish the difference in the integration profit
between ingots and the heavy products rolled therefrom.

This whole subject is a highly technical one, and chiefly of interest, perhaps, to the accountant. Illus-
trations of the differences in the effects produced by these two methods can be seen, however, by com-
paring the relative differences in the integration profits in Bessemer ingots and Bessemer rails, as shown
by the Bureau's computations (cf. pp. 61 and 66), with the relative differences for the same products as
shown by the Steel Corporation's figures. (Cf. pp. 113 and 118.)

It is unnecessary to discuss the relative merits of these two systems. It is obvious that one which is appli-
cable to a highly integrated concern like the Steel Corporation woiUd have no application at all to one which
made pig iron only. Such companies, however, were comprised in the Bureau's cost averages. Hence,
the best method for the Bureau was to use that which it actually applied.



Section 1. Basis of Bureau's computation.

The Bureau is not prepared in this prelimitiary report to enter into
an extended study of costs in relation to investment, but some approxi-
mate and tentative figures for one important steel product may be
presented in order to afford the reader a general idea of the invest-
ment required and of the significance of the cost data already dis-
cussed. For this purpose the Bureau selected standard Bessemer steel
raUs, and based its computations on a plant assumed to use Lake
Superior ores and chiefly Coimellsville coke. The results are pre-
sented in the form of ranges instead of averages. Owing to the
important influence of differences in amounts of production upon
average figures of investment per ton, averages should be iised only
with great discretion. Take, for example, a concern with an invest-
ment in a rail mill . (exclusive of any steel works or antecedent
stages) of, say, $4,000,000, with an output of 500,000 tons of rails
per year; such a* concern would show an average investment of $8 a
ton, whereas if it produced only 350,000 tons its average would be
$11.50 per ton.

In preparing this discussion the Bureau had very extensive figures
of investment for blast furnaces, Bessemer works, and rail mills, and
it is believed that the ranges later presented are fair and substantially
rehable for the purposes of the approximate conclusions reached.
In the case of the raw materials the data available were of a different
character, but the Bureau is of the opinion that the results obtained
may be rehed upon.

While it is desired to arrive at an investment per ton in order to
make a comparison with the profits per ton of steel raUs, it will be
found more convenient to work with amounts of total investment.
For this purpose the Bureau has assumed an iron and steel plant
producing steel raUs, although such a rail mill would of course
ordinarily form part of a more comprehensive plant, producing other
products for which, however, it is not necessary to present invest-
ment data here.

The Bureau assumed an ore consumption of 1,000,000 tons of
Bessemer ore yearly. Owing to the fact, as shown on page 21,



that about 1.84 tons of Bessemer ore are required to produce a ton of
Bessemer pig iron, 1 ,000,000 tons of ore would produce 544,500 tons oi
pig iron. Some rail and other scrap, however, could be used with such
pig iron in the manufacture of rails. It would require about 105 to
106 tons of such mixture of pig iron and scrap to make 100 tons of
ingots, and about 1.31 tons of ingots to make 100 tons of rails. In the
manufacture of rails, however, there would be a large amount of scrap,
a part of wliich could, as just explained, be used in the manufacture of
ingots (the remainder being sold or used elsewhere in the works). On
this basis, 544,500 tons of pig iron together with the amount of scrap
which could be reworked, would produce, roughly, 555,000 tons of rail
ingots, and from 425,000 to 430,000 tons of Bessemer steel rails.
These computations are necessarily approximate, depending some-
what upon mill practice. The Bureau has based its later calculations
on tlie lower figure, 425,000 tons.

As stated, such a plant as that in question would require an annual
ore supply of, roughly, 1,000,000 tons. Without attempting to fix
upon what is a proper reserve supply, a period of 30 years may be
taken as a fair basis for this discussion. Figuring on this basis such a
concern would require an ore reserve of approximately 30,000,000
tons. Tlie length assumed for the reserve period would of course have
a direct l)earing on the final result.

In the case of coke there would be required to produce the pig iron
(544,500 tons) necessary for this production of rails yearly an annual
supply of approximately 629,500 tons. As the yield of good coking
coal is about 67 per cent in coke, such a coke supply would call for an
annual suppl}^ of coal of 939,000 tons; on this basis a 30 years' supply
would be 28,170,000 tons.

In the case of limestone rather less than half a ton is required to
produce, a ton of pig iron. The annual supply of limestone needed
would be about 250,000 tons, and a 30 years' supply, roughly,
7,500,000 tons.

In this computation the Bureau has not included anything for trans-
portation investment in railroad, steamship, or dock facilities, be-
cause the ownership of such facilities and especially railroads by a
steel concern is an exceptional rather than a normal condition;
accordingly, the investment finally arrived at v.n.\l be compared Anth
the average profits for 1902 to 1906, as shown by the margin be-
tween price and cost exclusive of transfer profits only.

Having arrived at the total quantities of the various raw and inter-
mediate materials required for the production of 425,000 tons of
rails per year, the fixed investment in these various stages will now
be considered. An allowance for working^ capital will be made at
one point instead of distributing it to the various antecedent stages


Section 2. Approximate investment required in raw materials.

Lake ore. — As above shown, the rail plant here under considera-
tion has been allowed a reserve of, roughly, 30,000,000 tons of Lake
Superior ore. From what is said in Chapter IX, it is reasonably
certain that an estimate of $0.10 to $0.15 per ton for ore, taking
a reserve comprising both leasehold and fee properties, would be
sufficiently large. This is on the basis of estimated values for the
period 1902 to 1906 and not on what ore might cost a new concern
about to enter the steel business at present. Such an estimate would
include improvements, as well as the ore and the leaseholds themselves;
but, as just pointed out, it would not include anything for working
capital. On this basis, the total ore body under consideration, in-
cluding improvements, would represent an investment of from
$3,000,000 to $4,500,000.

It should be noted that, inasmuch as this discussion relates to a
plant making Bessemer steel rails, it would be necessary to have a
supply of Bessemer ore, and that in order to acquire a reserve of
30,000,000 tons of Bessemer ore in the Lake region it would probably
be necessary to make purchases of mining lands which would contain
a large amount of other ore. However, whUe only the total invest-
ment required for a Bessemer rail plant is here under discussion, this
should be regarded as a part of a larger integrated enterprise. Con-
sequently, non-Bessemer ores which might be incidentally acquired
by such a concern in order to get a Bessemer ore supply for its raH
plant would be available for the production of other iron and steel
products. Hence, it would not be proper to charge the cost of ac-
quiring these non-Bessemer ores against the Bessemer rail plant.

CoNNELLSviLLE COKE. — The average fixed investment of the Steel
Corporation in coking coal and coke property, as computed by the
Bureau for the period 1901 to 1910, was $8.37 per ton of coke pro-
duced, this investment covering coke ovens and mining improvements,
as well as a very large supply of choice Connellsville coking coal. This
investment is undoubtedly too high to be representative of conditions
generally. Taking the large steel companies as they are at present
organized, it is reasonable to assume that the ConnellsvUle coking
coal has not cost, on the average, over $1,000 to $1,200 per acre,
and the original cost of the Steel Corporation's coking coal to its
principal coke subsidiary (the H. C. Frick Coke Co.) was very much
less than this. However, as the H. C. Frick Coke Co. had acquired a
. large proportion of its present holdings of coking coal land long before
the Steel Corporation was organized, the low figures of earlier years
can not be fairly used in this computation.

As a rough average, the yield of good CoimeUsville coking coal per
acre may be set at about 10,000 tons.


On this basis an average investment of $1,200 per acre would be
equivalent to, roughly, $0.12 per ton. However, there is a large
supply of less expensive coking coal, such, for instance, as that
from the Pocahontas district, which is entirely satisfactory for
blast furnace coke. Assuming that a large steel concern would
have some of this coal as well as that in the Connellsville district, the
Bureau is of the opinion that an average cost of from $0.10 to $0.12
per ton for a reserve of coking coal would be reasonable. For the
28,170,000 tons of coking coal required in the case of the plant
here discussed, this would mean a total investment in coking coal of
from $2,817,000 to $3,380,000. To this should be added the mvest^
ment required in mining improvements, equipment, and miscel-
laneous facilities, which may be roughly placed at from $1,000,000
to $1,500,000. The investment in an ordinary coke oven may be
placed at from $750 to $1,000 per oven, or, say, from about $1.50 to
$2 per ton of coke produced. On this basis it would require an oven
investment of, roughly, $1,000,000 to $1,500,000 to produce the
annual output of 629,500 tons of coke here assumed to be necessary.

Steam coal oe gas. — Some large steel companies purchase their
supply, or the bulk of their supply, of steam and heating coal, or have
natural-gas properties to furnish the necessary fuel. Others mine
their own coal, and therefore an allowance for such a supply may be
included in this computation. For a plant producing 425,000 tons
of steel rails yearly, and not having natural-gas property, the
annual requirements of such coal would probably be in the neigh-
borhood of 150,000 tons. A 30 years' supply on this basis would be
4,500,000 tons. The cost of such supply, including necessary im-
provements and equipment, may be roughly approximated at
$500,000 to $1,000,000, according to the location, quality, and other
conditions. A considerable part of this would be for improvements.

In the case of concerns having a supply of natural gas, the invest-
ment would probably be somewhat less. For the purpose of this dis-
cussion, however, the foregoing estimates of from $500,000 to
$1,000,000 may be regarded as covering this fuel supply for power
and heating purposes, regardless of whether coal or gas was employed.

Limestone. — The investment in limestone property is compara-
tively small per ton of output. The cost of a limestone quarry which
would yield the above noted annual requirement (250,000 tons) for a
30-year period may be safely estimated at from not more than $75,000
to $150,000.


Section 3. Approximate investment required in manufacturing plants.

Blast furnaces. — For the determination of an average investment
in blast furnaces per ton of production, the Bureau had very complete
data. As stated in Part I, it obtained from the Steel Corporation a
detailed schedule of all of its manufacturing properties as of January 1,
1908, this distinguishing real estate from plants, and, moreover, list-
ing each particular kind of plant, as, for instance, blast furnaces,
Bessemer works, roUing mills for each kind of rolled product, as well
as auxiliary plants (such as power plants, shops, and pumping
plants) separately. Owing to the fact that the real estate, as well
as considerable of the miscellaneous property, such as auxihary plants,
had to be distributed among the different manufacturing depart-
ments, it was necessary to make some approximations and allocations
of a more or less arbitrary character. It was possible to arrive at
very close figures for the construction cost of blast furnaces and ac-
cessory plants, taking conditions as they actually existed. The
real-estate valuations, however, presented a more serious problem.
A considerable number of blast-furnace plants of the Steel Cor-
poration are located on very valuable sites, and in distributing the
total site among the various departments of the steel works a very
considerable acreage was necessarily allocated to the blast-furnace
plant. In several instances the land valuations averaged from
120,000 an acre upward. The original cost of this land was, of
course, very much less, and it is a fair question how far, in comput-
ing the investment required, the enhanced valuation now claimed
should be allowed. Since, however, the Bureau is endeavoring to
arrive at a result which wiU substantially represent actual condi-
tions, it was deemed proper to include these plants with very high
values of real estate with those built on much less expensive sites in
arriving at a general average.

While it is impracticable in this report to present, or even to
describe, in detail the Bureau's computations, it is believed that the
results arrived at fairly represent the facts as submitted to the
Bureau. It is probable, however, that the resulting averages are
somewhat too high because of the very high values for real estate just
discussed. Nevertheless, such figures of actual investment are far
more conclusive than engineers' estimates, which, however carefully
made as to plants, would necessarily be exceedingly arbitrary as to
plant sites.

As above stated, the Bureau worked from actual production rather
than capacity, and for this purpose it took the average actual output
for 1905 and 1906. These were both years of large production, and
it seemed fair to use these two years, the production for 1907 for these
plants severally not being available, though about the same as in 1906.
22299°— PT 2—12 10


It was not desirable to use the low production of 1904 in computing
the average investment per ton. On this basis blast-furnace plants
of the Steel Corporation representing an average annual production
for the two years 1905 and 1906 of nearly 10,000,000 tons of pig iron,
or practically the total output of the Corporation in those years,
showed an average investment per ton of $10.75. The valuations for
individual plants showed, of course, a very wide range — roughly, from
$4 to $16 per ton. The average valuation for furnaces of several
other companies with a total average production in these years of
about 1,000,000 tons was somewhat lower, at $10.05.

Taking all the circumstances into consideration, the Bureau is of the
opinion that for a rather close approximation a range of from $8.50
to $11.50 par ton is a reasonable one. On this basis the investment
in blast furnaces required to produce 544,500 tons of pig iron (the
amount which, as above shown, would be necessary — in addition
to scrap — to produce 425,000 tons of Bessemer steel rails aimually)
would be from $4,628,000 to $6,262,000.

Bessemer steel works. — The investment in Bessemer steel con-
verting plants per ton of product was comparatively small, including
its fair proportion of accessory plants and of real estate. Actual
average figures computed in substantially the same way as for
blast furnaces for 41 different Bessemer steel converters, with an
average annual tonnage in 1905 and 1906 of nearly 8,000,000 tons,
showed an average investment of $1.85, with an extreme range of
from $1.11 to $3.45. As an approximation this average investment
may fairly be placed at from $1.50 to $2.50 per ton. As above
shown, the Bessemer works should produce, roughly, 555,000 tons
of ingots yearly in order to provide for a production of 425,000 tons
of steel rails. On this basis the investment required in Bessemer
works would be from $832,500 to $1,387,500.

Rail mill. — The approximate investment in the steel-rail mill, in-
cluding blooming mill, besides accessory plants and a due propor-
tion of real estate for all of these, on the basis of the data obtained
from the Steel Corporation and some other large companies, compared
with the average annual output for 1905 and 1906 (2,250,000 tons, or
roughly 65 per cent of the total production of the country), showed
an average of $8.12 per ton. To use a range, however, the invest-
ment may fairly be placed at from $7.50 to $10 per ton of production.

Section 4. Average allowance for working capital.

The foregoing investment, it should be remembered, is for plant and
property only, and does not include working capital. The Bureau has
placed the average amount of working capital required by a con-
cern completely integrated with respect to raw materials and all


stages of manufacture (but excluding railroad, vessel, and dock
facOities) at not over $15 to $22.50 per ton of steel rails. The
average investment of the Steel Corporation in current assets per
ton of all finished steel products for the entire period 1901 to 1910
was almost exactly $22.50. This does not take account of the Cor-
poration's production of Portland cement ov of some minor products,
such as spelter and sulphate of iron, the inclusion of which would, of
course, have reduced the per ton average somewhat. The Steel
Corporation, however, carries very large inventories of ore. More-
over, it carries a very large amount of cash in banks. The average
amount of cash at the close of each year from 1901 to 1910 was,
roughly, $58,000,000. This cash item reduced to a per ton basis is
considerably higher than the average for the ordinary large iron and
steel concern.

The average net current assets for the tlu-ee of the largest com-
petitors of the Steel Corporation (the Lackawarma Steel Co., the
Cambria Steel Co., and the Jones & Laughlin Steel Co.), per ton of
finished steel products, over a period of several years, included within
the period 1901 to 1910 (representative data for the entire period not
being available because of reorganizations or changes in scope of
operations), ranged from $15 to $19 per ton. One reason for the
higher average for the Steel Corporation is that the Bureau did not
make any deduction on account of worldng assets employed in trans-

These averages are for all finished steel products collectively,
whereas the amounts of working capital required in the production
of different products vary considerably. The average working capi-
tal required by a completely integrated concern in the production of
steel rails would be considerably less than for several other finished
steel products of a more elaborated character, and rather less, it is
believed, than the average for all steel products collectively. In this
rough approximation in this preliminary report, however, it is unnec-
essary to enter into refinements and to attempt a distribution of work-
ing capital between different products. Such an allocation would be
more or less arbitrary under any circumstances. The Bureau has,
therefore, used the general averages obtained for all products for
representative companies, namely, $15 to $22.50 per ton, as applicable
to the production of steel rails, although it is reasonably certain that
the higher figure is considerably more than is actually necessary.

Section 6. Indicated rates of profit on basis of 1902-1906 costs.

On the foregoing basis the total average investment in fixed prop-
erty required to produce a ton of steel rails, with a plant capable of
an aimual production of 425,000 tons, including working assets at



from $15 to $22.50 per ton, would be approximately $55 to $80 per
ton. This will appear from the following summary :


[Calculations based on a plant with an annual production of 426,000 tons of Bessemer standard rails
and using Lake ore and chielly ConnellsTille coke. No investment in transportation facilities is here

Lake ore, including mine im-

Coking coal

Mine improvements, equipment,
and coke ovens


Coal or gas for heating and steam,
including improvements

Blast fumades and accessory

Bessemer steel works and acces-
sory equipment

Rail mill, blooming mill, and
accessory equipment

Working capital 2


Gross tons.

Gross tons.





10- .12


mate in-
per ton.

Approximate invest-
ment (total).

1.50- 2.60

2,817,000- 3,380,000

2,000,000- 3,000,000
76,000- 150,000

500,000- 1,000,000

4, 628,000-*, 262, 000

832,600- 1,387,500

3,187,600- 4,250,000
6,375,000- 9,662,500


ment per
ton of rails


.18- .35

1.17- 2.35





1 Net tons.

2 This working capital covers the entire business of producing rails from the ore up.

It should be understood, of course, that the above computations
are more or less approximate. In particular, it may be pointed out
that differences in mill practice might have some influence on the
investment in blast furnaces and in Bessemer works. The Bureau is
of the opinion, however, that the range in wliich its final results are
stated is sufficiently broad to take account of any probable variations
in this respect.

With tliis information it is possible to have some idea of the sig-
nificance of the profits on steel rails. Thus the price of standard Bes-
semer steel rails has been fixed at $28 per ton ever since the Steel
Corporation was organized. The average cost of steel rails for 1902
to 1906, as shown on page 66, this making no deduction for transpor-
tation profits, was $18.80 per ton. Tliis leaves a profit to be distrib-
uted over all stages of investment of $9.20 per ton. On the basis of
$55 per ton for this investment such a profit would be equivalent to
16.7 per cent, while on the basis of $80 per ton for the investment it
would be equivalent to 11.5 per cent.

It should be repeated that the foregoing computations are neces-
sarily rough and tentative. They serve, however, to illustrate the


poipt repeatedly emphasized throughout this report, that in deahng
with integration cost figures — that is, cost figures exclusive of any.
intercompany or interdepartmental profits — it is necessary to keep
constantly in mind the greater investment to which such cost figures
correspond. It should also once more be repeated that the question
of output so vitally affects the average investment when reduced to a
per ton basis that the possibilities of variation are very great. It is
beheved, however, that the range of from $55 to $80 per ton here
arrived at is fairly representative of existing conditions. An allowance

Online LibraryUnited States. Bureau of CorporationsReport of the commissioner of corporations on the steel industry ... → online text (page 68 of 70)